Example: Sample ADP Calculation

To perform the ADP test, you calculate a salary deferral percentage for every eligible employee. In the following example for a group of NHCEs, the numerator represents the amount of salary deferred by the employee. The denominator represents the employee's salary before the 401(k) deferral. This table illustrates this example:

Employee	Deferral Amount	Salary Before Deferral	Percentage
Employee #1	1,000.00 USD	25,000 USD	4
Employee #2	2,500 USD	34,000 USD	7.35
Employee #3	0 USD	22,000 USD	0
Employee #4	1,750 USD	28,000 USD	6.25
Employee #5	1,500 USD	32,500 USD	4.62

Employee #3 does not participate in the plan, but is included in the calculation with a zero amount because the employee meets minimum eligibility requirements to participate in the retirement plan. The average ADP for this group of employees is 4.44 percent.

After you calculate the averages for both the HCEs and NHCEs, you compare the percentages for both groups. In general, the average of the HCEs cannot exceed that of the NHCEs by more than 2 percent.

You perform the ACP test in the same manner, where the numerator represents the amount of matching employer contributions and after-tax contributions to the employee's account.

In the event of a failed test, the employer must make corrections by one of these methods:

• The employer makes a contribution to the plan to raise the NHCE amount to obtain acceptable test results.

• The employer returns part of the HCE's contributions to lower the HCE average to obtain acceptable test results.